House of Representatives

Taxation Laws Amendment (Venture Capital) Bill 2002

Second Reading Speech

Mr Slipper (Parliamentary Secretary to the Minister for Finance and Administration)

I move:

That this bill be now read a second time.

This bill, together with the Venture Capital Bill 2002, will establish an internationally competitive framework for venture capital investments. Establishing this framework will fulfil the government's election commitment to provide Australia with a world's best practice investment vehicle for venture capital. These measures form a crucial part of the government's program to encourage new foreign investment into the Australian venture capital market and to further develop the venture capital industry.

The Australian venture capital market plays a significant role in providing patient equity capital to start-up and expanding companies. It also supports the rejuvenation of more mature companies through managed and leveraged buy-outs.

This market has experienced significant growth over the past decade, including through foreign investment. By unlocking the potential for more rapid growth of Australia's venture capital market the measures in this bill will assist in realising Australia's innovation potential, which this government has recognised as a key element to Australia's future prosperity.

In recognition of this potential, this bill, together with the Venture Capital Bill 2002, contains measures to encourage additional foreign investment into the Australian venture capital market and to facilitate the development of the venture capital industry by encouraging leading international venture capital managers to locate in Australia.

The bill will amend the existing tax treatment of two types of limited partnership used to invest in Australian venture capital companies: venture capital limited partnerships and Australian venture capital funds of funds. These limited partnerships will be taxed as flowthrough entities in accordance with internationally recognised best practice for venture capital.

The bill also provides a tax exemption to eligible non-resident partners of these limited partnerships on the share of the profit or gain made when the partnership sells its interest in an eligible venture capital investment company. This tax exemption extends that currently available to certain foreign pension funds in similar circumstances.

Eligible non-residents that may qualify for the tax exemption are tax exempt residents of Canada, France, Germany, Japan, the United Kingdom and the United States; venture capital funds of funds established and managed in Canada, France, Germany, Japan, the United Kingdom and the United States; and taxable residents of Canada, Finland, France, Germany, Italy, Japan, the Netherlands (excluding the Netherlands Antilles) New Zealand, Norway, Sweden, Taiwan, the United Kingdom or the United States of America who hold less than 10 per cent of the committed capital in a venture capital limited partnership or an Australian venture capital fund of funds.

The bill further provides that other countries may be added to this list by regulation.

The bill also provides for the general partner's share of gains made on eligible venture capital investments by the venture capital limited partnerships and Australian venture capital funds of funds they manage to be taxed as a capital gain to the individual fund managers. Unlike managers in the passive funds management industry, venture capital managers are actively involved in the management of the companies in which the funds invest and typically share in capital gains on investments made by the fund after all the investors' committed capital has been returned. This is referred to as the carried interest and is designed to strongly align the interests of the fund manager and investors. To ensure the capital gains treatment of such gains flows through to the individual fund managers, if the general partner is a limited partnership it will also be treated as a flowthrough entity for tax purposes.

The measures recognise that venture capital limited partnerships with flowthrough taxation treatment are the preferred investment vehicles internationally and that countries competing with Australia for capital offer exemption from taxation on gains from the sale of those investments. Taxing the carried interest of venture capital managers as capital is also consistent with the international tax treatment of these gains. An internationally consistent tax treatment is critical in attracting highly skilled international venture capital managers to Australia. Such managers will contribute to the expertise and competitiveness of Australia's venture capital industry which, in turn, will attract venture capital funds by offshore investors.

These measures will therefore bring Australia into line with what is currently recognised as best practice within the international market. As a result, it is anticipated that there will be a strong increase in venture capital by non-residents over the medium term and that these measures will lay the foundations for greater participation by experienced venture capital fund managers in the Australian venture capital market.

I commend the bill to the House and present the explanatory memorandum. I also present the explanatory memorandum to the Venture Capital Bill 2002.

Debate (on motion by Mr Albanese) adjourned.